Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined by Rule 405 of the Securities
Act.

Yes
þNo
o

If this report is an annual or transitional report, indicate
by check mark if the registrant is not required to file reports
pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934.

Yes
oNo
þ

Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days.

Yes
þNo
o

Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such files). N/A

Yes
oNo
o

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):

Many statements made in this annual report are forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (Securities Act), and
Section 21E of the Securities Exchange Act of 1934, as
amended (Exchange Act), that are not based on historical facts
and are not assurances of future results. Many of the
forward-looking statements contained in this annual report may
be identified by the use of forward-looking words, such as
believe, expect, anticipate,
should, planned, estimate
and potential, among others. We have made
forward-looking statements that address, among other things, our:



regional marketing and expansion strategy;



drilling and other exploration activities;



import and export activities;



projected and targeted capital expenditures and other costs,
commitments and revenues;



liquidity; and



development of additional revenue sources.

Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause
actual results to differ materially from those expressed or
implied by these forward-looking statements. These factors
include, among other things:



our ability to obtain financing;



general economic and business conditions, including crude oil
and other commodity prices, refining margins and prevailing
exchange rates;



global economic conditions and the current global credit crisis;



our ability to find, acquire or gain access to additional
reserves and to successfully develop our current ones;



uncertainties inherent in making estimates of our oil and gas
reserves including recently discovered oil and gas reserves;



competition;



technical difficulties in the operation of our equipment and the
provision of our services;



changes in, or failure to comply with, laws or regulations;



receipt of governmental approvals and licenses;



international and Brazilian political, economic and social
developments; military operations, acts of terrorism or
sabotage, wars or embargoes;



the cost and availability of adequate insurance coverage; and



other factors discussed below under Risk Factors.

These statements are not guarantees of future performance and
are subject to certain risks, uncertainties and assumptions that
are difficult to predict. Therefore, our actual results could
differ materially from those expressed or forecast in any
forward-looking statements as a result of a variety of factors,
including those in Risk Factors set forth below.

All forward-looking statements are expressly qualified in their
entirety by this cautionary statement, and you should not place
reliance on any forward-looking statement contained in this
annual report. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of
new information or future events or for any other reason.

The crude oil and natural gas reserve data presented or
described in this annual report are only estimates and our
actual production, revenues and expenditures with respect to our
reserves may materially differ from these estimates.

This is the annual report of both Petróleo Brasileiro
S.A.PETROBRAS (Petrobras) and its direct wholly owned
Cayman Islands subsidiary, Petrobras International Finance
Company (PifCo). PifCos operations, which consist
principally of purchases and sales of crude oil and oil
products, are described in further detail below.

Unless the context otherwise requires, the terms
Petrobras, we, us, and
our refer to Petróleo Brasileiro
S.A.PETROBRAS and its consolidated subsidiaries and
special purpose companies, including Petrobras International
Finance Company. The term PifCo refers to Petrobras
International Finance Company and its subsidiaries.

Proved oil and gas reserves are the estimated quantities of
crude oil, natural gas and natural gas liquids that geological
and engineering data demonstrate with reasonable certainty are
recoverable in future years from known reservoirs under existing
economic and operating conditions, i.e., prices and costs as of
the date the estimate is made. Prices include consideration of
changes in existing prices provided only by contractual
arrangements, but not escalations based upon future conditions.

Proved developed reserves

Proved developed reserves are reserves that can be expected to
be recovered through existing wells with existing equipment and
operating methods. Additional oil and gas expected to be
obtained through the application of fluid injection or other
improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery are included as
proved developed reserves only after testing by a
pilot project or after the operation of an installed program has
confirmed through production response that increased recovery
will be achieved.

Proved undeveloped reserves

Proved undeveloped reserves are reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing
wells where a relatively major expenditure is required for
recompletion, but do not include reserves attributable to any
acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such
techniques have been proved effective by actual tests in the
area and in the same reservoir. Reserves on undrilled acreage
are limited to those undrilled units offsetting productive units
that are reasonably certain of production when drilled. Proved
reserves for other undrilled units are claimed only where it is
demonstrated with certainty that there is continuity of
production from the existing productive formation.

In this annual report, references to real,reais or R$ are to Brazilian
reais and references to U.S. dollars or
U.S.$ are to the United States dollars. Certain
figures included in this annual report have been subject to
rounding adjustments; accordingly, figures shown as totals in
certain tables may not be an exact arithmetic aggregation of the
figures that precede them.

The audited consolidated financial statements of Petrobras and
our consolidated subsidiaries as of December 31, 2008 and
2007, and for each of the three years in the period ended
December 31, 2008, and the accompanying notes, contained in
this annual report have been presented in U.S. dollars and
prepared in accordance with U.S. generally accepted
accounting principles, or U.S. GAAP. See Item 5.
Operating and Financial Review and Prospects and
Note 2(a) to our audited consolidated financial statements.
We also publish financial statements in Brazil in reais
in accordance with the accounting principles required by Law
No. 6404/76, as amended, or Brazilian Corporate Law and the
regulations promulgated by the Comissão de Valores
Mobiliários (Brazilian Securities Commission, or the
CVM), or Brazilian GAAP, which differs in significant respects
from U.S. GAAP.

Certain prior year amounts for 2007, 2006, 2005 and 2004 have
been reclassified to conform to current year presentation
standards. These reclassifications had no impact on our net
income.

Our functional currency is the Brazilian real. As
described more fully in Note 2(a) to our audited
consolidated financial statements, the U.S. dollar amounts
as of the dates and for the periods presented in our audited
consolidated financial statements have been recalculated or
translated from the real amounts in accordance with the
criteria set forth in Statement of Financial Accounting
Standards No. 52, or SFAS 52, of the
U.S. Financial Accounting Standards Board, FASB.
U.S. dollar amounts presented in this annual report have
been translated from reais at the period-end exchange
rate for balance sheet items and the average exchange rate
prevailing during the period for income statement and cash flow
items.

Unless the context otherwise indicates:



historical data contained in this annual report that were not
derived from the audited consolidated financial statements have
been translated from reais on a similar basis;



forward-looking amounts, including estimated future capital
expenditures, have all been based on our Petrobras 2020
Strategic Plan, which covers the period from 2008 to 2020, and
on our
2009-2013
Business Plan, and have been projected on a constant basis and
have been translated from reais in 2009 at an estimated
average exchange rate of R$2.10 to U.S.$1.00, and future
calculations involving an assumed price of crude oil have been
calculated using a Brent crude oil price of U.S.$58 per barrel
for 2009, U.S.$61 per barrel for 2010, U.S.$72 for 2011, U.S.$74
for 2012 and U.S.$68 per barrel for 2013, adjusted for our
quality and location differences, unless otherwise
stated; and



estimated future capital expenditures are based on the most
recently budgeted amounts, which may not have been adjusted to
reflect all factors that could affect such amounts.

PifCos functional currency is the U.S. dollar.
Substantially all of PifCos sales are made in
U.S. dollars and all of its debt is denominated in
U.S. dollars. Accordingly, PifCos audited
consolidated financial statements as of December 31, 2008
and 2007, and for each of the three years in the period ended
December 31, 2008, and the accompanying notes contained in
this annual report have been presented in U.S. dollars and
prepared in accordance with U.S. GAAP and include
PifCos wholly owned subsidiaries: Petrobras Europe
Limited, Petrobras Finance Limited, Bear Insurance Company
Limited (BEAR) and Petrobras Singapore Private Limited.

Since December 31, 2008, PifCo has incurred
U.S.$1,500 million of indebtedness through the issuance of
notes in the international capital market and
U.S.$4,000 million of indebtedness through various credit
facilities. See Item 5. Operating and Financial
Review and ProspectsLiquidity and Capital
ResourcesPifCoLong-Term Indebtedness Incurred after
December 31, 2008.

On May 19, 2009, we concluded negotiations with China
Development Bank for a bilateral loan in the amount of
U.S.$10 billion. The loan will have a tenor of
10 years and the proceeds will be used to finance our
2009-2013 Business Plan and to finance the acquisition of goods
and services from Chinese companies.

The estimates of our proved reserves of crude oil and natural
gas as of December 31, 2008, included in this annual report
have been calculated according to the technical definitions
required by the U.S. Securities and Exchange Commission, or
the SEC. DeGolyer and MacNaughton provided estimates of most of
our net domestic reserves as of December 31, 2008. All
reserve estimates involve some degree of uncertainty. See
Item 3. Key InformationRisk FactorsRisks
Relating to Our Operations for a description of the risks
relating to our reserves and our reserve estimates.

We also file oil and gas reserve estimates with governmental
authorities in most of the countries in which we operate. On
January 15, 2009, we filed reserve estimates for Brazil
with the ANP, in accordance with Brazilian rules and
regulations, totaling 11.9 billion barrels of crude oil and
condensate and 12.7 trillion cubic feet of natural gas. The
reserve estimates we filed with the ANP and those provided
herein differ by approximately 27%. This difference is due to
(i) the ANP requirement that we estimate proved reserves
through the technical abandonment of production wells, as
opposed to limiting reserve estimates to the life of our
concession contracts as required by
Rule 4-10
of
Regulation S-X
and (ii) different technical criteria for booking proved
reserves, including the use of
3-D seismic
data to establish proved reserves in Brazil and the use of

average oil prices as opposed to year-end prices to determine
the economic producibility of reserves in Brazil.

We also file reserve estimates from our international operations
with various governmental agencies under the guidelines of the
Society of Petroleum Engineers, or SPE. The aggregate reserve
estimates from our international operations, under SPE
guidelines, amounted to 0.497 billion barrels of crude oil
and NGLs and 2,967 billion cubic feet of natural gas, which
is approximately 8.24% higher than the reserve estimates
calculated under
Regulation S-X,
as provided herein. This difference occurs because, unlike
Regulation S-X,
the SPEs technical guidelines allow for the booking of our
reserves in Nigeria based on certain oil recovery techniques,
such as fluid injection, based on analogous fields.

In December 2008, the SEC adopted revisions to its oil and gas
reporting rules in order to modernize and update the oil and gas
disclosure requirements. The changes bring the reporting
guidance up to date with advances made in the industry around
oil and gas reserves determinations. We are studying the impact
of the new SEC guidelines for reporting of our oil and gas
proved reserves. The new SEC guidelines have not gone into
effect and have not been used in the determination of reserves
for year-end 2008.

The following tables set forth our
selected consolidated financial data, presented in
U.S. dollars and prepared in accordance with
U.S. GAAP. The data for each of the five years in the
period ended December 31, 2008 has been derived from our
audited consolidated financial statements, which were audited by
KPMG Auditores Independentes for the years ended
December 31, 2008, 2007 and 2006 and by Ernst &
Young Auditores Independentes S/S for each of the years ended
December 31, 2005 and 2004. The information below should be
read in conjunction with, and is qualified in its entirety by
reference to, our audited consolidated financial statements and
the accompanying notes and Item 5. Operating and
Financial Review and Prospects.

Certain prior year amounts for
2007, 2006, 2005 and 2004 have been reclassified to conform to
current year presentation standards. These reclassifications had
no impact on our net income.

We carried out a two-for-one stock
split on April 25, 2008. Share and per share amounts for
all periods give effect to the stock split.

(3)

We carried out a four-for-one
reverse stock split in July 2007 that changed the ratio of
underlying shares to American Depositary Shares from four shares
for each ADS to two shares for each ADS. Per share amounts for
all periods give effect to the stock split.

The following tables set forth
PifCos selected consolidated financial data, presented in
U.S. dollars and prepared in accordance with
U.S. GAAP. The data for each of the five years in the
period ended December 31, 2008 have been derived from
PifCos audited consolidated financial statements, which
were audited by KPMG Auditores Independentes for the years ended
December 31, 2008, 2007 and 2006, and by Ernst &
Young Auditores Independentes S/S for each of the years ended
December 31, 2005 and 2004. The information below should be
read in conjunction with, and is qualified in its entirety by
reference to, PifCos audited consolidated financial
statements and the accompanying notes and Item 5.
Operating and Financial Review and Prospects.

Subject to certain procedures and specific regulatory
provisions, there are no limitations to the purchase and sale of
foreign currency and the international transfer of reais
as long as the underlying transaction is valid. Foreign
currencies may only be purchased through financial institutions
domiciled in Brazil and authorized to operate in the exchange
market. We cannot predict whether the Central Bank or the
Brazilian government will continue to let the real float
freely or will intervene in the exchange rate market through a
currency band system or otherwise.

The real appreciated 8.1% in 2004 against the
U.S. dollar and continued to appreciate 11.8% in 2005, 8.7%
in 2006 and 17.2% in 2007 and 10.1% in the first half of 2008.
Beginning in the second half of 2008, the real greatly
depreciated against the U.S. dollar. The real
depreciated 31.9% against the U.S. dollar in 2008. As
of May 20, 2009, the real has appreciated to R$2.020
per U.S.$1.00, representing an appreciation of approximately
13.6% in 2009 year-to-date. The real may depreciate
or appreciate substantially in the future. See Risk
FactorsRisks Relating to Brazil.

The following table provides
information on the selling exchange rate, expressed in reais
per U.S. dollar (R$/U.S.$), for the periods indicated.
The table uses the commercial selling rate prior to
March 14, 2005.

(R$/U.S.$)

High

Low

Average(1)

Period End

Year ended December 31,

2008

2.500

1.559

1.836

2.337

2007

2.156

1.733

1.947

1.771

2006

2.371

2.059

2.175

2.138

2005

2.762

2.163

2.435

2.341

2004

3.205

2.654

2.926

2.654

Month:

December 2008

2.500

2.337

2.398

2.337

January 2009

2.380

2.189

2.313

2.316

February 2009

2.392

2.245

2.320

2.378

March 2009

2.422

2.238

2.313

2.315

April 2009

2.290

2.170

2.202

2.178

May 2009 (through May 20, 2009)

2.178

2.020

2.098

2.020

Source: Central Bank of Brazil

(1)

Annual average exchange rates
represent the average of the month-end exchange rates during the
relevant period. Monthly average exchange rates represent the
average of the exchange rates at the close of trading on each
business day during such period.

Brazilian law provides that, whenever there is a serious
imbalance in Brazils balance of payments or there are
serious reasons to foresee

a serious imbalance, temporary restrictions may be imposed on
remittances of foreign capital abroad. See Risk
FactorsRisks Relating to Brazil.

The majority of our revenue is derived primarily from sales of
crude oil and oil products and, to a lesser extent, natural gas.
We do not, and will not, have control over the factors affecting
international prices for crude oil, oil products and natural
gas. The average price of Brent crude, an international
benchmark oil, was approximately U.S.$96.99 per barrel for 2008,
U.S.$72.52 per barrel for 2007 and U.S.$65.14 per barrel for
2006, and the price of Brent crude was U.S.$41.76 per barrel on
April 30, 2009. Changes in crude oil prices typically
result in changes in prices for oil products and natural gas.

Historically, international prices for crude oil, oil products
and natural gas have fluctuated widely as a result of many
factors. These factors include:

Volatility and uncertainty in international prices for crude
oil, oil products and natural gas may continue. Substantial or
extended declines in international crude oil prices may have a
material adverse effect on our business, results of operations
and financial condition, and the value of our proved reserves.
Significant decreases in the price of crude

oil may cause us to reduce or alter the timing of our capital
expenditures, and this could adversely affect our production
forecasts in the medium term and our reserve estimates in the
future. In addition, our pricing policy in Brazil is intended to
be at parity with international product prices over the long
term. In general we do not adjust our prices for diesel,
gasoline and LPG during periods of volatility in the
international markets. As a result, material rapid or sustained
increases in the international price of crude oil and oil
products may result in reduced downstream margins for us, and we
may not realize all the gains that our competitors realize in
periods of higher international prices.

Our ability to achieve our long-term growth objectives,
including those defined in our
2009-2013
Business Plan, is highly dependent upon our ability to obtain
new concessions through new bidding rounds and discover
additional reserves, as well as to successfully develop our
existing reserves. We will need to make substantial investments
to achieve the growth targets set forth in our
2009-2013
Business Plan and we cannot assure you we will be able to raise
the required capital.

Further, our competitive advantage in bidding rounds for new
concessions in Brazil has diminished over the years as a result
of the increased competition in the oil and gas sector in
Brazil. In addition, our exploration activities expose us to the
inherent risks of drilling, including the risk that we will not
discover commercially productive crude oil or natural gas
reserves. The costs of drilling wells are often uncertain, and
numerous factors beyond our control (such as unexpected drilling
conditions, equipment failures or accidents, and shortages or
delays in the availability of drilling rigs and the delivery of
equipment) may cause drilling operations to be curtailed,
delayed or cancelled. These risks are heightened when we drill
in deep and ultra-deep water. Deep and ultra-deepwater drilling
represented approximately 35% of the exploratory wells we
drilled in 2008.

Unless we conduct successful exploration and development
activities or acquire properties containing proved reserves, or
both, and are able to raise the necessary capital to fund these
activities, our proved reserves will decline as reserves are
extracted. If we fail to gain access to additional reserves we
may not achieve our goals for production growth for 2009 through
2013 and our results of operations and financial condition may
be adversely affected.

The current global financial crisis and uncertain economic
environment that worsened in the second half of 2008 have led to
a worldwide decrease in demand for oil products. As a result,
prices for oil products have fallen and our cash flows have been
reduced. If oil prices remain low, we may be required to revise
our growth objectives, particularly in light of substantial
decreases in the availability of credit in the capital markets.
The global financial and economic situation may also have a
negative impact on third parties with whom we do, or may do,
business. Any of these factors may affect our results of
operations, financial condition and liquidity.

A guaranteed source of crude oil and natural gas reserves is
essential to an oil and gas companys sustained production
and generation of income. Under Brazilian law, the Brazilian
government owns all crude oil and natural gas reserves in Brazil
and the concessionaire owns the oil and gas it produces. We
possess the exclusive right to develop our reserves pursuant to
concession agreements awarded to us by the Brazilian government
and we own the hydrocarbons we produce under the concession
agreements, but if the Brazilian government were to restrict or
prevent us from exploiting these crude oil and natural gas
reserves, our ability to generate income would be adversely
affected.

The proved crude oil and natural gas reserves set forth in this
annual report are our estimated quantities of crude oil, natural
gas and natural gas liquids that geological and engineering data
demonstrate with reasonable certainty to be recoverable from
known reservoirs under existing economic and operating
conditions (i.e., prices and costs as of the date the estimate
is made). Our proved developed crude oil and natural gas
reserves are reserves that can be expected to be recovered
through existing wells with existing equipment and operating
methods. There are uncertainties in estimating quantities of
proved reserves related to prevailing crude oil and natural gas
prices applicable to our production, which may lead us to make
revisions to our reserve estimates. Downward revisions in our
reserve estimates could lead to lower future production, which
could have an adverse effect on our results of operations and
financial condition.

Exploiting our oil and gas discoveries in the pre-salt
reservoirs will require substantial additional amounts of
capital, human resources and a broad range of offshore oil
services. A primary operational challenge will be increasing our
drilling rig fleet. The availability of existing rigs is
limited, as is shipyard capacity to build new drilling units. We
are continually forced to prioritize between development wells
and exploration wells, and we may not be able to secure as many
drilling rigs as we will require to meet our exploration,
production and development goals with respect to our pre-salt
reservoirs.

and in other jurisdictions in which we operate. In Brazil, we
could be exposed to administrative and criminal sanctions,
including warnings, fines and closure orders for non-compliance
with these environmental regulations, which, among other things,
limit or prohibit emissions or spills of toxic substances
produced in connection with our operations. We have experienced
oil spills in the past that resulted in fines by various state
and federal environmental agencies, and several civil and
criminal proceedings and investigations. See Item 8.
Financial InformationLegal Proceedings. Waste
disposal and emissions regulations may also require us to clean
up or retrofit our facilities at substantial cost and could
result in substantial liabilities. The Instituto Brasileiro
do Meio Ambiente e dos Recursos Naturais Renováveis
(Brazilian Institute of the Environment and Renewable
Natural Resources, or IBAMA) routinely inspects our oil
platforms in the Campos Basin, and may impose fines,
restrictions on operations or other sanctions in connection with
its inspections. In addition, we are subject to environmental
laws that require us to incur significant costs to cover damage
that a project may cause to the environment. These additional
costs may have a negative impact on the profitability of the
projects we intend to implement or may make such projects
economically unfeasible.

As environmental regulations become more stringent, and as new
laws and regulations relating to climate change, including
carbon controls, become applicable to us, it is probable that
our capital expenditures for compliance with environmental
regulations and to effect improvements in our health, safety and
environmental practices will increase substantially in the
future. In addition, because our capital expenditures are
subject to approval by the Brazilian government, increased
expenditures to comply with environmental regulations could
result in reductions in other strategic investments. Any
substantial increase in expenditures for compliance with
environmental regulations or reduction in strategic investments
may have a material adverse effect on our results of operations
or financial condition.

We are currently a party to numerous legal proceedings relating
to civil, administrative, environmental, labor and tax claims
filed against us. These claims involve substantial amounts of
money and other remedies. Several individual disputes account
for a significant part of the total amount of claims against us.
For example, on the grounds that drilling and production
platforms may not be classified as sea-going vessels, the
Brazilian Revenue Service asserted that overseas remittances for
charter payments should be reclassified as lease payment and
subject to a withholding tax of 25%. The Revenue Service has
filed two tax assessments against us that in the aggregate, on
December 31, 2008, amounted to
R$4,372 million (approximately
U.S.$1,871 million). See Item 8. Financial
InformationLegal Proceedings.

In the event that claims involving a material amount and for
which we have no provisions were to be decided against us, or in
the event that the losses estimated turn out to be significantly
higher than the provisions made, the aggregate cost of
unfavorable decisions could have a material adverse effect on
our financial condition and results of operations. In addition,
our management may be required to direct its time and attention
to defending these claims, which could preclude them from
focusing on our core business. Depending on the outcome, certain
litigation could result in restrictions on our operations and
have a material adverse effect on certain of our businesses.

Over the past five years, we have invested, alone or with other
investors, in a number of gas-fired power plants in Brazil.
These gas-fired power plants provide non-base-load capacity to
the grid and tend to operate at low average utilization rates.
This low utilization rate has a negative effect on our ability
to provide a return on these investments.

Natural gas demand is also influenced by general economic
conditions and oil prices. In the first quarter of 2009,
non-thermoelectric demand for natural gas in Brazil declined 22%
compared to average demand in 2008, due primarily to a downturn
in the industrial sector and lower

international prices for crude oil and oil products, the
primary alternatives to natural gas. Our natural gas prices do
not immediately adjust to fluctuations in the international
price of crude oil and oil products, which can make natural gas
less competitive until it adjusts to lower international prices.
Sustained declines in the Brazilian natural gas market may have
a material adverse effect on our results of operations and
financial condition.

We are also subject to fines and may lose our license to sell
electricity if we are unable to fulfill our energy delivery
commitments to the Agência Nacional de Energia
ElétricaANEEL, the Brazilian energy regulator,
due to gas supply constraints. There are several factors that
may affect our ability to deliver gas to our gas-fired power
plants including our inability to secure supply of natural gas,
problems affecting our natural gas infrastructure and increasing
demand in the non-thermoelectric market. See Item 4.
Information on the CompanyGas and
EnergyPowerElectricity Sales for a more
detailed description of these risks.

As a result of the foregoing, our investment in the natural gas
and domestic power markets has generated losses in the past and
may not generate the returns we expect in the future.

The impacts of fluctuations in exchange rates, especially the
real/U.S. dollar rate, on our operations are varied
and may be material. The principal market for our products is
Brazil, as over the last three fiscal years over 73% of our
revenues have been denominated in reais, while some of
our operating expenses and capital expenditures and a
substantial portion of our indebtedness are, and are expected to
continue to be, denominated in or indexed to U.S. dollars
and other foreign currencies. In addition, during 2008 we
imported U.S.$22.2 billion of crude oil and oil products,
the prices of which were all denominated and paid in
U.S. dollars. Conversely, a substantial share of our liquid
assets are held in U.S. dollar denominated assets, or
indexed to the U.S. dollar, but we do not use forwards,
swaps and futures contracts to mitigate the impact of changes in
currency values

on our operations and financial statements because of their
limited liquidity and cost.

Our recent financial statements reflect the appreciation of the
real by 11.8%, 8.7% and 17.2% against the
U.S. dollar in 2005, 2006 and 2007, respectively, and the
depreciation of the real by 31.9% against the
U.S. dollar in 2008. The weakness of the U.S. dollar
against other currencies in general has also affected our
results. As of May 20, 2009, the exchange rate of the
real to the U.S. dollar was R$2.020 per U.S.$1.00,
representing an appreciation of approximately 13.6% in 2009,
year-to-date.

As of December 31, 2008, approximately
66%U.S.$17,956 million of our total
indebtednessconsisted of floating rate debt. In light of
cost considerations and market analysis, we decided not to enter
into derivative contracts or make other arrangements to hedge
against the risk of an increase in interest rates. Accordingly,
if market interest rates (principally LIBOR) rise, our financing
expenses will increase, which could have an adverse effect on
our results of operations and financial condition.

We do not maintain coverage for business interruptions of any
nature for our Brazilian operations, including business
interruptions caused by labor action. If, for instance, our
workers were to strike, the resulting work stoppages could have
an adverse effect on us. In addition, we do not insure most of
our assets against war or sabotage. Therefore, an attack or an
operational incident causing an interruption of our business
could have a material adverse effect on our financial condition
or results of operations.

We operate in a number of different countries, particularly in
Latin America, West Africa and the Middle East, that can be
politically, economically and socially unstable. The results of
operations and financial condition of our

subsidiaries in these countries may be adversely affected by
fluctuations in their local economies, political instability and
governmental actions relating to the economy, including:



the imposition of exchange or price controls;



the imposition of restrictions on hydrocarbon exports;



the fluctuation of local currencies;



the nationalization of oil and gas reserves, as experienced in
recent years in Venezuela, Ecuador and Bolivia;



increases in export tax and income tax rates for crude oil and
oil products, as experienced in recent years in Argentina,
Venezuela, Ecuador and Bolivia; and



unilateral (governmental) institutional and contractual changes,
including controls on investments and limitations on new
projects, as experienced in recent years in Venezuela, Ecuador
and Bolivia.

If one or more of the risks described above were to materialize
we may lose part or all of our reserves in the affected country
and we may not achieve our strategic objectives in these
countries or in our international operations as a whole, which
may result in a material adverse effect on our results of
operations and financial condition.

Of the countries outside of Brazil in which we operate,
Argentina is the most significant, representing 44.65% of our
total international crude oil and natural gas production and
31.71% of our international proved crude oil and natural gas
reserves as of December 31, 2008. The Argentine government
has established export tax rates for crude oil, natural gas and
oil products that have negatively affected our results of
operations and financial condition. We also have significant
operations in Bolivia and Venezuela that represented,
respectively, 24.32% and 6.29% of our total international
production in barrels of oil equivalent at December 31,
2008. Bolivia accounted for 31.02% of our international proved
crude oil and natural gas reserves at December 31, 2008.
On

January 25, 2009, Bolivia adopted a new constitution that
prohibits private ownership of the countrys oil and gas
resources. In light of the new constitution, we may be required
to write off some or all of our proved reserves in Bolivia at
the end of 2009. For more information about our operations
outside Brazil, see Item 4, Information on the
CompanyInternational.

PifCos financial position and results of operations are
directly affected by our decisions. PifCo is a direct wholly
owned subsidiary of Petrobras incorporated in the Cayman Islands
as an exempted company with limited liability. PifCo purchases
crude oil and oil products from third parties and sells them at
a premium to us on a deferred payment basis. PifCo also
purchases crude oil and oil products from us and sells them
outside Brazil. Accordingly, intercompany activities and
transactions, and therefore PifCos financial position and
results of operations, are affected by decisions made by us.
Additionally, PifCo sells and purchases crude oil and oil
products to and from third parties and related parties mainly
outside Brazil. Commercial operations are carried out under
market conditions and at market prices. PifCos ability to
service and repay its indebtedness is consequently dependent on
our own operations.

Financing for PifCos operations is provided by us, as well
as third-party credit providers in favor of whom we provide
credit support. Our support to PifCos debt obligations is
made through guarantees and standby purchase agreements whereby
we agree to repurchase from the holders of PifCos notes
their right to receive payment from PifCo in the event PifCo
defaults on its payment obligations.

Our own financial condition and results of operations, as well
as our financial support of PifCo, directly affect PifCos
operational results and debt servicing capabilities. For a more
detailed description of certain risks that may have a material
adverse impact on our financial condition or results of
operations and therefore affect PifCos ability to meet its
debt obligations, see Risks Relating to Our
Operations.

PifCo is principally engaged in the purchase of crude oil and
oil products for sale to us, as described above. PifCo regularly
incurs indebtedness related to such purchases
and/or in
obtaining financing from us or third-party creditors. All such
indebtedness has the benefit of a guaranty, a standby purchase
obligation or other support from us, and PifCo has historically
passed on its financing costs to us by selling crude oil and oil
products to us at a premium to compensate for its financing
costs. If for any reason we are not permitted to continue these
practices, this would have a materially adverse effect on
PifCos business and on its ability to meet its debt
obligations in the long term.

The Brazilian government, as our controlling shareholder, has
pursued, and may pursue in the future, certain of its
macroeconomic and social objectives through us. Brazilian law
requires the Brazilian government to own a majority of our
voting stock, and so long as it does, the Brazilian government
will have the power to elect a majority of the members of our
board of directors and, through them, a majority of the
executive officers who are responsible for our day-to-day
management. As a result, we may engage in activities that give
preference to the objectives of the Brazilian government rather
than to our own economic and business objectives.

In particular, we continue to assist the Brazilian government to
ensure that the supply and pricing of crude oil and oil products
in Brazil meets Brazilian consumption requirements. Accordingly,
we may make investments, incur costs and engage in sales on
terms that may have an adverse effect on our results of
operations and financial condition. Prior to January 2002,
prices for crude oil and oil products were regulated by the
Brazilian government, occasionally set below prices prevailing
in the world oil markets. We cannot assure you that future
governments in Brazil will not reinstate price controls.

The Brazilian government maintains control over our investment
budget and establishes limits on our investments and long-term
debt. As a state-controlled entity, we must submit our proposed
annual budgets to the Ministry of Planning, Budget and
Management, the Ministry of Mines and Energy, and the Brazilian
Congress for approval. If our approved budget reduces our
proposed investments and incurrence of new debt and we cannot
obtain financing that does not require Brazilian government
approval, we may not be able to make all the investments we
envision, including those we have agreed to make to expand and
develop our crude oil and natural gas fields. If we are unable
to make these investments, our operating results and financial
condition may be adversely affected.

The Brazilian
government has historically exercised, and continues to
exercise, significant influence over the Brazilian economy.
Brazilian political and economic conditions have a direct impact
on our business and may have a material adverse effect on our
results of operations and financial condition.

The Brazilian governments economic policies may have
important effects on Brazilian companies, including us, and on
market conditions and prices of Brazilian securities. Our
financial condition and results of operations may be adversely
affected by the following factors and the Brazilian
governments response to these factors:

regulatory policy for the oil and gas industry, including
pricing policy; and



other political, diplomatic, social and economic developments in
or affecting Brazil.

We may specifically be affected by certain initiatives to
increase taxation on our upstream activities. In June 2003, the
State of Rio de Janeiro enacted a new tax law that imposed a
Domestic State Tax (ICMS) on our upstream activities, including
on import of oil and gas exploratory equipment. The State of Rio
de Janeiro has never enforced this law, and its
constitutionality is being challenged in the Brazilian Supreme
Court (Supremo Tribunal Federal, or STF). In the event
that the state government attempts to enforce this law and the
courts uphold that enforcement, we estimate that the amount of
ICMS that we would be required to pay to the State of Rio de
Janeiro could increase approximately R$10.7 billion
(U.S.$6.2 billion) per year. In addition, there have been
recent initiatives in the Brazilian Congress to reform the
Brazilian tax laws and there is a risk that the proposed reforms
would increase taxation on our upstream activities. Due to the
uncertainties related to these initiatives, we cannot quantify
what our tax burden would be if the new laws or reforms were
approved.

In addition, the recent discovery of large petroleum and natural
gas reserves in the pre-salt geological layer of the Campos and
Santos basins has prompted discussions on possible changes to
the existing Oil Law. The Brazilian government has created an
inter-ministerial committee to consider substantial changes in
the regulation of exploration and production activities in areas
of the pre-salt geological layer not subject to existing
concessions. The committee has not yet made a formal
recommendation to the Brazilian government, and we cannot
estimate the impact that any change to the Oil Law would have on
Petrobras, or when any new regulations may become effective. See
Item 4. Information on the CompanyRegulation of
the Oil and Gas Industry in BrazilDiscussions on Possible
Changes to the Oil Law.

Uncertainty over whether the Brazilian government will implement
these or other changes in policy or regulations that may affect
any of the factors mentioned above or other

factors in the future may lead to economic uncertainty in
Brazil and increase the volatility of the Brazilian securities
market and securities issued abroad by Brazilian companies. Such
changes in policies and regulations may have a material adverse
effect on our results of operations and financial condition.

Our principal market is Brazil, which has, in the past,
periodically experienced extremely high rates of inflation.
Inflation, along with governmental measures to combat inflation
and public speculation about possible future measures, has had
significant negative effects on the Brazilian economy. The
annual rates of inflation have been historically high in Brazil
prior to 1995 and Brazil experienced hyperinflation in the past.
As measured by the National Consumer Price Index (Índice
Nacional de Preços ao Consumidor Amplo, or IPCA),
Brazil had annual rates of inflation of 3.14% in 2006, 4.46% in
2007 and 5.90% in 2008. Considering the historically high rates
of inflation, Brazil may experience higher levels of inflation
in the future. The lower levels of inflation experienced since
1995 may not continue. Future governmental actions,
including actions to adjust the value of the real, could
trigger increases in inflation, which may adversely affect our
financial condition.

The market value of securities of Brazilian companies is
affected to varying degrees by economic and market conditions in
other countries, including the United States and other Latin
American and emerging market countries. Although economic
conditions in these countries may differ significantly from
economic conditions in Brazil, investors reactions to
developments in these other countries may have an adverse effect
on the market value of securities of Brazilian issuers. Crises
in other countries or economic policies of other

countries may diminish investor interest in securities of
Brazilian issuers, including ours. This could adversely affect
the market price of our shares and ADSs, and could limit our
ability to finance our operations.

The recent global financial crisis has had significant
consequences worldwide, including in Brazil, such as stock and
credit market volatility, unavailability of credit, higher
interest rates, a general slowdown of the world economy,
volatile exchange rates and inflationary pressure, among others,
which have and may continue to, directly or indirectly,
adversely affect our operating results, financial position and
the price of securities issued by Brazilian companies.

Petrobras shares are some of the most liquid in the São
Paulo Stock Exchange (Bovespa), but overall, the Brazilian
securities markets are smaller, more volatile and less liquid
than the major securities markets in the United States and other
jurisdictions, and may be regulated differently from the way in
which U.S. investors are accustomed. Factors that may
specifically affect the Brazilian equity markets may limit the
ability of holders of ADSs to sell the common or preferred
shares underlying our ADSs at the price and time they desire.

Some of PifCos notes are not listed on any securities
exchange and are not quoted through an automated quotation
system. We can make no assurance as to the liquidity of or
trading markets for PifCos notes. We cannot guarantee that
the holders of PifCos notes will be able to sell their
notes in the future. If a market for PifCos notes does not
develop, holders of PifCos notes may not be able to resell
the notes for an extended period of time, if at all.

Holders of ADSs who are residents of the United States may not
be able to exercise the preemptive rights relating to the common
or preferred shares underlying our ADSs unless a registration
statement under the U.S. Securities Act is effective with
respect to those rights or an exemption from the registration
requirements of the Securities Act is available. We are not
obligated to file a registration statement with respect to the
common or preferred shares relating to these preemptive rights,
and therefore we may not file any such registration statement.
If a registration statement is not filed and an exemption from
registration does not exist, JPMorgan Chase Bank, N.A., as
depositary, will attempt to sell the preemptive rights, and
holders of ADSs will be entitled to receive the proceeds of the
sale. However, the preemptive rights will expire if the
depositary cannot sell them. For a more complete description of
preemptive rights with respect to the common or preferred
shares, see Item 10. Additional
InformationMemorandum and Articles of Association of
PetrobrasPreemptive Rights.

Restrictions
on the movement of capital out of Brazil may impair the ability
of holders of ADSs to receive dividends and distributions on,
and the proceeds of any sale of, the common or preferred shares
underlying the ADSs and may impact our ability to service
certain debt obligations, including guarantees and standby
purchase agreements we have entered into in support of
PifCos notes.

The Brazilian government may impose temporary restrictions on
the conversion of Brazilian currency into foreign currencies and
on the remittance to foreign investors of proceeds from their
investments in Brazil. Brazilian law permits the Brazilian
government to impose these restrictions whenever there is a
serious imbalance in Brazils balance of payments or there
are reasons to foresee a serious imbalance.

The Brazilian government imposed remittance restrictions for
approximately six months in 1990. The Brazilian government could
decide to take similar measures in the future. Similar
restrictions, if imposed, could impair or prevent the conversion
of dividends, distributions,

or the proceeds from any sale of common or preferred shares
from reais into U.S. dollars and the remittance of
the U.S. dollars abroad. If such restrictions were imposed,
the depositary for the ADSs would hold the reais it
cannot convert for the account of the ADS holders who have not
been paid. The depositary would not invest the reais and
would not be liable for the interest.

Similar restrictions, if imposed, could also impair or prevent
the conversion of payments under guaranty and standby purchase
agreements supporting PifCos notes from reais into
U.S. dollars and the remittance of the U.S. dollars
abroad. In the case that the PifCo noteholders receive payments
in reais corresponding to the equivalent U.S. dollar
amounts due under PifCos notes, it may not be possible to
convert these amounts into U.S. dollars. These
restrictions, if imposed, could also prevent us from making
funds available to PifCo in U.S. dollars abroad, in which
case PifCo may not have sufficient U.S. dollar funds
available to make payment on its debt obligations.

In addition, payments of dividends and other distributions to
shareholders and payments under Petrobras guarantees and
standby purchase agreements in connection with PifCos
notes do not currently require approval by or registration with
the Central Bank of Brazil. The Central Bank of Brazil may
nonetheless impose prior approval requirements on the remittance
of U.S. dollars abroad, which could cause delays in such
payments.

The Brazilian custodian for our common or preferred shares
underlying our ADSs must obtain a certificate of registration
from the Central Bank of Brazil to be entitled to remit
U.S. dollars abroad for payments of dividends and other
distributions relating to our preferred and common shares or
upon the disposition of the common or preferred shares. If
holders of ADSs decide to exchange their ADSs for the underlying
common or preferred shares, they will be entitled to continue to
rely, for five Brazilian business days from the date of
exchange, on the custodians certificate of registration.
After that period, such holders may not be able to obtain and
remit U.S. dollars abroad

upon the disposition of the common or preferred shares, or
distributions relating to the common or preferred shares, unless
they obtain their own certificate of registration or register
under Resolution No. 2,689, of January 26, 2000, of
the Conselho Monetário Nacional (National Monetary
Council), which entitles registered foreign investors to buy and
sell on the São Paulo Stock Exchange. In addition, if such
holders do not obtain a certificate of registration or register
under Resolution No. 2,689, they may be subject to less
favorable tax treatment on gains with respect to the common or
preferred shares.

If such holders attempt to obtain their own certificate of
registration, they may incur expenses or suffer delays in the
application process, which could delay their ability to receive
dividends or distributions relating to the common or preferred
shares or the return of their capital in a timely manner. The
custodians certificate of registration or any foreign
capital registration obtained by such holders may be affected by
future legislative or regulatory changes and we cannot assure
such holders that additional restrictions applicable to them,
the disposition of the underlying common or preferred shares, or
the repatriation of the proceeds from the process will not be
imposed in the future.

Our corporate affairs are governed by our bylaws and Brazilian
Corporate Law, which differ from the legal principles that would
apply if we were incorporated in a jurisdiction in the United
States or elsewhere outside Brazil. In addition, the rights of
an ADS holder, which are derivative of the rights of holders of
our common or preferred shares, as the case may be, to protect
their interests against actions by our board of directors are
different under Brazilian Corporate Law than under the laws of
other jurisdictions. Rules against insider trading and
self-dealing and the preservation of shareholder interests may
also be less developed and enforced in Brazil than in the United
States. In addition, shareholders in Brazilian companies
ordinarily do not have standing to bring a class action.

We are a state-controlled company organized under the laws of
Brazil and all of our directors and officers reside in Brazil.
Substantially

all of our assets and those of our directors and officers are
located in Brazil. As a result, it may not be possible for
holders of ADSs to effect service of process upon us or our
directors and officers within the United States or other
jurisdictions outside Brazil or to enforce against us or our
directors and officers judgments obtained in the United States
or other jurisdictions outside Brazil. Because judgments of
U.S. courts for civil liabilities based upon the
U.S. federal securities laws may only be enforced in Brazil
if certain requirements are met, holders of ADSs may face
greater difficulties in protecting their interest in actions
against us or our directors and officers than would shareholders
of a corporation incorporated in a state or other jurisdiction
of the United States.

Holders of ADSs may encounter difficulties in the exercise of
some of their rights as a shareholder if they hold our ADS
rather than the underlying shares. For example, if we fail to
provide the depositary with voting materials on a timely basis,
holders of ADSs may not be able to vote by giving instructions
to the depositary on how to vote for them.

In addition, a portion of our ADSs represents our preferred
shares. Under Brazilian law and our bylaws, holders of preferred
shares generally do not have the right to vote in meetings of
our stockholders. This means, among other things, that holders
of ADSs representing preferred shares are not entitled to vote
on important corporate transactions or decisions. See
Item 10. Additional InformationMemorandum and
Articles of Incorporation of PetrobrasVoting Rights
for a discussion of the limited voting rights of our preferred
shares.

We have entered into a standby purchase agreement in support of
some of PifCos obligations under its notes and indentures.
Our obligation to purchase from the PifCo noteholders any unpaid
amounts of principal, interest and other amounts

due under the PifCo notes and the indenture applies, subject to
certain limitations, irrespective of whether any such amounts
are due at the maturity of the PifCo notes or otherwise.

We have been advised by our counsel that the enforcement of the
standby purchase agreement in Brazil against us, if necessary,
will occur under a form of judicial process that, while similar,
has certain procedural differences from those applicable to
enforcement of a guarantee and, as a result, the enforcement of
the standby purchase agreement may take longer than would
otherwise be the case with a guarantee.

If proceedings were brought in Brazil seeking to enforce our
obligations in respect of the guaranty and standby purchase
agreement relating to PifCos notes, we would be required
to discharge our obligations only in reais. Under the
Brazilian exchange control rules, an obligation to pay amounts
denominated in a currency other than reais, which is
payable in Brazil pursuant to a decision of a Brazilian court,
may be satisfied in reais at the rate of exchange, as
determined by the Central Bank of Brazil, in effect on the date
of payment.

PifCos obligation to make payments on the PifCo notes is
supported by our obligation under the guaranty or standby
purchase agreement. We have been advised by our external
U.S. counsel that the guaranty and the standby purchase
agreement are valid and enforceable in accordance with the laws
of the State of New York and the United States. In addition, we
have been advised by our general counsel that the laws of Brazil
do not prevent the guaranty and the standby purchase agreement
from being valid, binding and enforceable against us in
accordance with their terms. In the event that U.S. federal
fraudulent conveyance or similar laws are applied to the
guaranty and the standby purchase agreement, and we, at the time
we

were or are insolvent or rendered insolvent by reason of our
entry into such guaranty or standby purchase agreement;



were or are engaged in business or transactions for which the
assets remaining with us constituted unreasonably small
capital; or



intended to incur or incurred, or believed or believe that we
would incur, debts beyond our ability to pay such debts as they
mature; and



in each case, intended to receive or received less than
reasonably equivalent value or fair consideration therefore,

then our obligations under the guaranty and the standby purchase
agreement could be avoided, or claims with respect to such
agreements could be subordinated to the claims of other
creditors. Among other things, a legal challenge to the guaranty
and the standby purchase agreement on fraudulent conveyance
grounds may focus on the benefits, if any, realized by us as a
result of PifCos issuance of these notes. To the extent
that the guaranty and the standby purchase agreement are held to
be a fraudulent conveyance or unenforceable for any other
reason, the holders of the PifCo notes would not have a claim
against us under the relevant guaranty and standby purchase
agreement and will solely have a claim against PifCo. We cannot
assure you that, after providing for all prior claims, there
will be sufficient assets to satisfy the claims of the PifCo
noteholders relating to any avoided portion of the guaranty and
the standby purchase agreement.

Petróleo Brasileiro S.A.PETROBRASwas
incorporated in 1953 to conduct the Brazilian governments
hydrocarbon activities. We began operations in 1954 and for
approximately forty years carried out crude oil and natural gas
production and refining activities in Brazil on behalf of the
government.

In the 1990s, in a series of legislative actions, the Brazilian
state relinquished its monopoly on oil and gas activities. On
November 9, 1995, the Brazilian constitution was amended to
authorize the Brazilian government to contract with any state or
privately owned company to carry out upstream and downstream oil
and gas activities in Brazil. On August 6, 1997, Brazil
enacted the Oil Law (Law No. 9,478), which established
competition in Brazilian markets for crude oil, oil products and
natural gas. Effective January 2, 2002, Brazil deregulated
prices for crude oil, oil products and natural gas. See
Regulation of the Oil and Gas Industry in
BrazilPrice Regulation.

Our common and preferred shares have been traded on the São
Paulo Stock Exchange since 1968. Petrobras was incorporated as a
state-controlled company under Law No. 2,004 (effective
October 3, 1953), and a majority of our voting capital must
be owned by the Brazilian federal government, a state or a
municipality. As of December 31, 2008, the Brazilian
government owned 32.2% of our outstanding capital stock and
55.7% of our voting shares. We operate through subsidiaries,
joint ventures, and associated companies established in Brazil
and many other countries. Our principal executive office is
located at Avenida República do Chile 65,
20031-912
Rio de Janeiro, RJ, Brazil and our telephone number is
(55-21)3224-4477.

We are an integrated oil and gas company that is the largest
corporation in Brazil and one of the largest companies in Latin
America in terms of revenues. Because of our legacy as
Brazils former sole supplier of crude oil and oil products
and our ongoing commitment to development and growth, we operate
most of Brazils producing oil and gas fields and hold a
large base of proved reserves and a fully developed operational
infrastructure. In 2008, our average domestic daily hydrocarbons
production was 2,176 mboe/d, an estimated 98.5% of Brazils
total. Over 84% of our proved reserves are in large, contiguous
and highly productive fields in the offshore Campos Basin, which
allows us to concentrate our operational infrastructure and
limit our costs of exploration, development and production. In
40 years of developing Brazils offshore basins we
have developed special expertise in deepwater

exploration and production, which we exploit both in Brazil and
in other offshore oil provinces.

We operate substantially all the refining capacity in Brazil.
Most of our refineries are located in Southeastern Brazil,
within the countrys most populated and industrialized
markets and adjacent to the Campos Basin that provides most of
our crude oil. Our domestic refining capacity of 1,942 mbbl/d is
well balanced with our domestic refining production of 1,787
mbbl/d and sales of oil products to domestic markets of 1,748
mbbl/d. We are also involved in the production of petrochemicals
and fertilizers. We distribute oil products through our own
BR network of retailers and to wholesalers.

We participate in most aspects of the Brazilian natural gas
market. This market has been constrained by the level of
domestic gas production and our transportation and distribution
infrastructure. We expect that our natural gas activities will
grow in the future as we expand our production of both
associated and non-associated gas, mainly from offshore fields
in the Campos, Espírito Santo and Santos basins, and extend
Brazils gas transportation infrastructure. We use LNG
terminals to meet demand and diversify our supply. We also
participate in the domestic power market primarily through our
investments in gas-fired thermoelectric power plants.

Internationally, we are active in 23 countries. In Latin
America, our operations extend from exploration and production
to refining,

marketing, retail services and natural gas pipelines. In North
America, we produce oil and gas and have refining operations in
the United States. In Africa, we produce oil in Angola and
Nigeria, and in Asia, we have refining operations in Japan. In
other countries, we are engaged only in oil and gas exploration.

Our activities comprise five business segments:



Exploration and
Production: oil and gas exploration, development
and production in Brazil;

The following tables set forth our
estimated net proved developed and undeveloped reserves of crude
oil and natural gas by region as of December 31, 2008:

Reserves of Crude Oil

Developed

Undeveloped

Total

(mmbbl)

Brazil:

Offshore:

Campos Basin

4,802.2

3,066.5

7,868.7

Other

116.7

107.1

223.8

Total offshore

4,918.9

3,173.6

8,092.5

Onshore

427.6

196.2

623.8

Total Brazil

5,346.5

3,369.8

8,716.3

International:

Argentina

90.3

27.5

117.8

Bolivia

28.7

7.4

36.1

Colombia

18.3

10.3

28.6

Ecuador

5.7

0.6

6.3

Peru

46.0

54.1

100.1

United States

5.9

9.6

15.5

Angola

1.2

0.0

1.2

Nigeria

14.8

68.8

83.6

Total International

210.9

178.3

389.2

Group

5,557.4

3,548.1

9,105.5

Equity and non-consolidated affiliates(1):

Venezuela

27.6

21.6

49.2

(1)

Companies in which Petrobras has a
minority interest.

Reserves of Natural Gas

Developed

Undeveloped

Total

(bncf)

Brazil:

Offshore:

Campos Basin

2,610.3

2,005.9

4,616.2

Other

1,168.2

1,680.5

2,848.7

Total offshore

3,778.5

3,686.4

7,464.9

Onshore

1,291.4

589.7

1,881.1

Total Brazil

5,069.9

4,276.1

9,346.0

International:

Argentina

555.4

481.8

1,037.1

Bolivia

1,040.8

448.8

1,489.6

Colombia

0.6

0.5

1.1

Ecuador

1.4

0.3

1.8

Nigeria

25.6

1.3

26.9

Peru

63.2

47.5

110.7

United States

67.9

58.3

126.2

Total International

1,754.9

1,038.5

2,793.4

Group

6,824.8

5,314.6

12,139.4

Equity and non-consolidated affiliates(1):

Venezuela

47.3

28.4

75.7

(1)

Companies in which Petrobras has a
minority interest.

We calculate reserves based on forecasts of field production,
which depend on a number of technical parameters, such as
seismic interpretation, geological maps, well tests and economic
data. All reserve estimates involve some degree of uncertainty.
The uncertainty depends mainly on the amount of reliable
geological and engineering data available at the

time of the estimate and the interpretation of this data. Our
estimates are thus made using the most reliable data at the time
of the estimate, in accordance with the best practices in the
oil and gas industry. DeGolyer and MacNaughton (D&M)
reviewed and certified 94% of our domestic proved crude oil,
condensate and natural gas reserve estimates as of
December 31, 2008. The

estimates for the certification were performed in accordance
with
Rule 4-10
of
Regulation S-X
of the SEC. See Supplementary Information on Oil and Gas
Producing Activities beginning on
page F-107
for further details on our proved reserves.

The statements contained in this Item 4 regarding
exploration and development projects and production estimates
are forward-looking and subject to significant risks and
uncertainties. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we
cannot guarantee that our actual levels of activity, production
or performance will meet these expectations. See Item 3.
Key InformationRisk Factors.

Oil and gas exploration and production activities in Brazil are
the largest component of our company portfolio. In 1970, we
produced 164 mbbl/d of crude oil, condensate and natural gas
liquids in Brazil. We increased production to 181 mbbl/d in
1980, 654 mbbl/d in 1990, 1,271 mbbl/d in 2000 and 1,855 mbbl/d
in 2008. In 1974 we made our first discovery in the Campos Basin
offshore in Brazil, which now accounts for over 84% of our
proved reserves. We aim to grow oil and gas reserves and
production sustainably and be recognized for excellence in
Exploration and Production operations. Our primary goals are to:



explore and develop oil resources in increasingly deeper
waters in the Campos Basin;

develop gas resources in the Santos Basin and elsewhere to
meet Brazils growing demand for gas and increase the
contribution of domestic gas production to meeting that demand;



explore and develop the potentially substantial pre-salt
reservoirs that lie below the Espírito Santo, Campos and
Santos basins; and



sustain and increase production from onshore fields
through drilling and enhanced recovery operations.

In new areas, our activities typically begin with geological
research and seismic activities, followed by exploratory
drilling. When this yields encouraging results, we proceed with
extended well tests, development drilling and pilot production,
which typically involve substantial investments. It usually
takes several years for successful exploration activity to be
reflected in increased reserves and production.

During 2008, our oil and gas production from Brazil averaged
2,176 mboe/d, of which 85% was oil and 15% was natural gas. On
December 31, 2008, our estimated net proved crude oil and
natural gas reserves in Brazil were 10.3 billion boe, of
which 85% was crude oil and 15% was natural gas. Brazil provided
91% of our worldwide production in 2008 and accounted for 92% of
our worldwide reserves at December 31, 2008 on a barrels of
oil-equivalent basis. Historically, approximately 85% of our
total Brazilian production has been oil; in the future, we plan
to increase the share of natural gas to meet increasing domestic
demand.

Brazils richest oil fields are located offshore, most of
them in deep waters. Since 1971, when we started exploration in
the Campos Basin, we have been active in these waters and we
have become globally recognized as innovators in the technology
required to explore and produce hydrocarbons in deep and
ultra-deep water. We operate more production (on a boe basis)
from fields in deep and ultra-deep water than any other company,
according to PFC Energy, an energy consultancy. In 2008,
offshore production accounted for 88% of our production and
deepwater production accounted for 76% of our production in
Brazil. At December 31, 2008, we operated 155 wells in
water deeper than 1,000 meters (3,281 feet). By
December 31, 2008, we had drilled around 322 exploratory
wells in water deeper than 1,000 meters (3,281 feet). We
continue to upgrade our deepwater technologies. See Item 5.
Operating and Financial Review and ProspectsResearch
and Development.

Offshore exploration, development and production costs are
generally higher than those onshore, but we have been able to
offset these higher costs by higher drilling success ratios,
larger discoveries and greater production volumes. We have
historically been successful in finding and developing
significant oil reservoirs offshore,

which has allowed us to achieve economies of scale by spreading
the total costs of exploration, development and production over
a large base. By focusing on opportunities that are close to
existing production infrastructure, we limit the incremental
capital requirements of new field development.

We have also implemented a variety of asset-rationalization
programs designed to increase oil recovery from existing fields
and reduce natural decline from producing fields.

Our exploration and production activities outside Brazil are
included in our International business segment. See
International.

We conduct exploration, development and production activities in
Brazil through concession contracts, which we obtain through
participation in bid rounds conducted by the ANP. Some of our
existing concessions were granted by the ANP without an auction
in 1998, as provided by the Oil Law. These are known as the
Round Zero concession contracts. Since such time, we
have participated in all

of the auction rounds and in the most recent round of December
2008, we acquired 27 of the 54 blocks offered, for a total of
10,476
km2
(2.6 million acres).

Our domestic oil and gas
exploration and production efforts are primarily focused on
three major basins offshore in Southeastern Brazil: Campos,
Espírito Santo and Santos.

The Campos Basin, which covers approximately 115,000
km2
(28.4 million acres), is the most prolific oil and gas
basin in Brazil as measured by proved hydrocarbon reserves and
annual production. Since we began exploring this area in 1971,
over 60 hydrocarbon accumulations have been discovered,
including eight large oil fields in deep and ultra-deep water.
The Campos Basin is our largest oil- and gas-producing region,
producing an average 1,547 mbbl/d of oil and 23.7
mmm3/d
(894.3 mmcf/d) of associated natural gas during 2008, 77% of our
total production from Brazil.

At December 31, 2008, we were producing from 39 fields at
an average rate of 1,593 mbbl/d of oil and held proved crude oil
reserves representing 90% of our total proved crude oil reserves
in Brazil.

At December 31, 2008, we held proved natural gas reserves
in the Campos Basin representing 49% of our total proved natural
gas reserves in Brazil. We operated 34 floating production
systems, 14 fixed platforms and 5,697 km (3,540 miles) of
pipeline and flexible pipes in water depths from 80 to 1,886
meters (262 to 6,188 feet), delivering oil with an average
API gravity of 23.1° and an average BSW of 1%.

We have made several discoveries of light oil and natural gas in
the Espírito Santo Basin, which covers approximately 75,000
km2
(18.5 million acres) offshore and 14,000
km2
(3.5 million acres) onshore. At December 31, 2008, we
were producing from 41 fields at an average rate of 69.2 mbbl/d
and held proved crude oil reserves, representing 1% of our total
proved crude oil reserves in Brazil. At December 31, 2008,
we were producing natural gas at an average rate of 7.2
mmm3/d
(273 mmcf/d)
and held proved natural gas reserves representing 7% of our
total proved natural gas reserves in Brazil.

On December 31, 2008, we held exploration rights to 35
blocks, 18 onshore and 17 offshore, comprising 9,359.88
km2
(2.3 million acres).

We are developing two deepwater projects to increase natural gas
production from the Espírito Santo Basinthe Camarupim
project served by the FPSO Cidade de São Mateus with
capacity to produce 10
mmm3/d,
and the Canapu project served by the FPSO Cidade de Vitória
with capacity to produce 2
mmm3/dboth
of which are expected to come on stream in the second quarter of
2009.

In addition to developing new projects, we are also optimizing
existing resources in the Golfinho field by moving the FPSO
Capixaba to the Parque das Baleias field in the Campos Basin in
anticipation of our pre-salt exploration efforts there. We will
reconnect the well previously served by the FPSO Capixaba to
another FPSO in the Golfinho field.

The Santos Basin, which covers approximately 348,900
km2
(86 million acres) off the city of Santos, in the State of
São Paulo, is one of the most promising exploration areas
offshore Brazil and the focus of our plans to develop domestic
natural gas. At December 31, 2008, we produced oil from one
field at an average rate of 1.8 mbbl/d and held proved crude oil
reserves representing 0.5% of our total proved crude oil
reserves in

Brazil. At December 31, 2008, we produced natural gas at
an average rate of 0.721
mmm3/d
(25.46 mmcf/d) and held proved natural gas reserves in the
Santos Basin representing 17% of our total proved natural gas
reserves in Brazil.

In January 2006, we approved the U.S.$18 billion ten-year
Master Plan for Development of Natural Gas and Oil Production in
the Santos Basin, which will substantially increase our gas
production to meet increasing domestic gas demand. We
subsequently established a second plan, known as Plangas, to
accelerate gas production and build supporting infrastructure in
the Santos and Espírito Santo basins. As part of this plan,
we are developing the Mexilhão and Urugua-Tambau deepwater
fields described below. We expect these investment plans to
increase our average gas production from the Santos Basin from
0.66 mmm3/d
(23.3 mmcf/d) in 2008 to 11.4
mmm3/d
(402.5 mmcf/d) in 2010.

Gas development plans for the Santos Basin include:



Mexilhão, located in shallow water in Santos Basin
Block BS-400, is scheduled to come on stream in 2010 with
initial production of approximately
6.5 mmm3/d
(229.5 mmcf/d), potentially increasing to 8.0
mmm3/d
(282.5
mmcf/d) in
2012;



Urugua-Tambau is expected to produce at an initial rate of
3.5
mmm3/d
(123.6 mmcf/d)
in 2010, potentially increasing to 7.0
mmm3/d
(247.2 mmcf/d) of gas and 30 mbbl/d of light oil in
2012; and



Lagosta, expected to come on stream in 2009, with initial
production of approximately 1.4
mmm3/d
(49.4 mmcf/d),
potentially increasing to 1.8
mmm3/d
(63.6 mmcf/d).

On December 31, 2008, we held exploration rights to 62
blocks in the Santos Basin, comprising 36,259.54
km2
(9.0 million acres).

In recent years, we have focused our offshore exploration
efforts on pre-salt reservoirs located in a region approximately
800 km (497 miles) long and 200 km (124 miles) wide
stretching from the Campos to the Santos basins.

We have drilled 30 wells in this 114,000
km2
(28.2 million acre) area since 2005, 87% of which have
yielded discoveries of hydrocarbon resources. We are the
operator in most of these exploration areas, and hold interests
in them ranging from 20% to 100%. In the southern part of the
region, where the salt layer is thick and the hydrocarbons have
been more perfectly preserved, we have made particularly
promising discoveries, including Block BM-S-11 (Tupi and Iara)
in the Santos Basin in 2006 and 2008. In the northern part of
the region, we made a significant discovery in the area known as
Parque das Baleias, in the Campos Basin in 2008.

We intend to commit substantial resources to develop these
pre-salt discoveries, which are located in deep and ultra-deep
waters at target depths of between 5,000 and 7,000 meters
(16,404 and 22,966 feet) and present considerable technical
challenges. Over the next five years we plan to invest
U.S.$28.9 billion, approximately 31% of our total domestic
capital expenditures for exploration and production in the
period, in the development of the pre-salt reservoirs.

Our existing concessions cover approximately 23% (26,000
km2 or
6.4 million acres) of the pre-salt reservoirs. An
additional 2% (3,000
km2 or
0.7 million acres) is under concession to other oil
companies for exploration. The remaining 75% (85,000
km2 or
21 million acres) of the pre-salt region is not yet under
concession, and the licensing of new pre-salt concessions is on
hold pending the outcome of a regulatory review by the Brazilian
government. See Regulation of the

Oil and Gas Industry in BrazilDiscussions on Possible
Changes to the Oil Law.

In the pre-salt region of the Santos Basin, first oil was
produced during an extended well test in Tupi, which began in
May 2009. It will be followed by a pilot system FPSO with
capacity of 100 mbbl/d, which is scheduled to start up in Tupi
by the end of 2010. Although we have made promising discoveries
in the region, we are still in the early stages of our
exploration efforts and do not expect to classify any pre-salt
reserves as proven before 2010. In addition to the EWTs, we will
drill a number of appraisal wells to better understand and
delineate the pre-salt reservoirs in the Santos Basin. We also
expect to start up two pilot systems in Iara and Guará
during
2013-2014.
We expect that future new-source production from the Santos
Basin will be predominantly from pre-salt reservoirs.

In the pre-salt region of the Campos Basin, we drilled two wells
off the coast of the State of Espírito Santo and made a
significant discovery of intermediate oil (30° API) in the
Parque das Baleias area. In September 2008, we commenced an EWT
in this area, with a single well pilot system producing in the
Jubarte field at an average rate of 10 to 12 mbbl/d. We are
continuing to study these promising finds and expect to
accelerate pre-salt production in Parque das Baleias using
existing infrastructure in the area. In December 2008, we began
another EWT with a dynamic positioned vessel in the Cachalote
field and we expect to start producing from this field and from
the Baleira Franca field using an existing FPSO by the second
half of 2010.

The map below shows the location
of the pre-salt reservoirs as well as the status of our
exploratory activities there.

Other Basins

We produce hydrocarbons and hold exploration acreage in eight
other basins in Brazil. Of these, the most significant are the
shallow offshore Camamu Basin and the onshore Potiguar,
Recôncavo, Rio Grande do Norte, Sergipe, Alagoas and
Solimões basins. While our onshore production

is primarily in mature fields, we plan to sustain and slightly
increase production from these fields in the future by using
enhanced recovery methods.

We had a total of 312 production agreements as of
December 31, 2008, and were the 100% owner in 285 of them.
We are operators under 15 of our 27 partnership agreements.

As of December 31, 2008, we had 186 exploration agreements
covering 256 blocks, and 35 evaluation plans. We are exclusively
responsible for conducting the exploration activities in 77 of
the 186 exploration agreements. As of December 31, 2008, we
had partnerships in exploration with 29 foreign and domestic
companies, for a total of 109 agreements. We conduct exploration
activities under 70 of our 109 partnership agreements.

We focus much of our exploration effort on deepwater drilling,
where the discoveries are substantially larger and our
technology and expertise create a competitive advantage. In

2008, we invested a total of U.S.$2.47 billion in
exploration activities in Brazil. We drilled a total of
135 gross exploratory wells in 2008, of which 47 were
offshore and 88 onshore, with a success ratio of 44%.

Because offshore Brazil is geographically isolated from other
offshore drilling areas, and because we often drill in unusually
deep waters, we plan carefully for our future drilling rig
needs. By using a combination of our own rigs and units that we
contract for periods of five years or longer, we have
historically ensured the availability of drilling units to meet
our needs, and paid lower average day rates than if we had
contracted the units on a spot basis. We continually evaluate
our need for rigs,

renew our drilling contracts, contract ahead for rigs as
needed, and stimulate new rig construction by

signing long-term operating leases with drilling contractors
for rigs that are not yet built.

Drilling Units in Use by Exploration and Production

On December 31

2008

2007

2006

Leased

Owned

Leased

Owned

Leased

Owned

Onshore

25

11

14

13

6

13

Offshore, by water depth (WD)

31

8

27

8

24

9

Jack-up rigs

2

4

1

4

1

5

Floating rigs:

500 to 1000 meter WD

9

2

6

2

4

2

1000 to 1500 meters WD

10

1

10

1

10

1

1500 to 2000 meters WD

7

1

7

1

7

1

2000 to 2500 meters WD

2

0

2

0

1

0

2500 to 3000 meters WD

1

0

1

0

1

0

We have entered into five- to seven-year contracts beginning in
2009 and 2010 for 15 new drilling rigs. Two will operate in
water depths of less than 1,000 meters (6,560 feet), three
may operate in water depths of 2,000 meters (6,560 feet),
nine may operate in water depths of 2,400 meters
(7,830 feet), and one will drill in water depths of 3,000
meters (9,840 feet). All of such new rigs will be chartered.

In 2008, higher oil prices contributed to cost inflation in the
industry and reduced availability of oil and gas production
equipment. We have taken measures to minimize cost and risk by
simplifying and standardizing our equipment, wherever possible.
We are increasing our use of industry-standard equipment instead
of developing our own custom-made standards and equipment. We
also intend to minimize costs by dividing engineering
procurement and construction packages into smaller pieces and
purchasing equipment from or contracting with a greater number
of competitors, as well as by increasing oversight over
suppliers.

On December 31, 2008, our estimated reserves of crude oil
and natural gas in Brazil totaled 10.3 billion barrels of
oil equivalent, including: 8.7 billion barrels of crude oil
and natural gas liquids and 247.6 bnm3 (9.3 tcf) of natural gas.
As of December 31, 2008, our domestic proved developed
crude oil reserves represented 61% of our total domestic proved
developed and undeveloped crude oil reserves. Our domestic
proved developed natural gas reserves represented 54% of our
total domestic proved developed and undeveloped natural gas
reserves. Total domestic proved crude oil reserves decreased at
an average annual rate of 1% in the last

five years. Natural gas proved reserves increased at an average
annual rate of 3% over the same period. Recent discoveries in
our pre-salt reservoirs are still under evaluation and are not
included in our proved reserves.

We are in discussions with ANP about the possible extension of
the production concessions we hold for our major producing
fields. In 2007 and 2008, we received a positive response from
ANP about extending the concession for the Albacora Leste,
Barracuda, Marlim Leste, Marlim Sul, Roncador, Marlim,
Espadarte, Albacora, Jubarte, Cachalote, Baleia Franca,
Candeias, Canto do Amaro, Ubarana and Siririzinho fields, which
resulted in an increase in our proved reserves in those fields.
We are discussing with ANP similar amendments to other
production concessions.

See Overview of the Group, and
Supplementary Information on Oil and Gas Producing
Activities in our audited consolidated financial
statements for further details on our proved reserves.

We are an integrated company with a dominant market share in our
home market. As of December 31, 2008, we operated 98.4% of
Brazils total refining capacity and we supplied almost all
of the refined product needs of third-party wholesalers,
exporters and petrochemical companies, in addition to the needs
of our Distribution segment. We own and operate eleven
refineries in Brazil, with a total net distillation capacity of
1,942 mbbl/d, making us the worlds eighth largest refiner
among publicly traded companies.

We operate a large and complex infrastructure of pipelines and
terminals and a

shipping fleet to transport oil products and crude oil to
domestic and export markets. Most of our refineries are located
near our crude oil pipelines, storage facilities, refined
product pipelines and major petrochemical facilities,
facilitating access to crude oil supplies and end-users.

We also import and export crude oil and oil products. We import
certain oil products, particularly diesel, for which Brazilian
demand exceeds refining capacity. We expect the need for imports
to decline in the future as we build

additional refining capacity and upgrade our refineries to
facilitate the processing of domestically produced crudes. We
export our surplus heavy crude oil, and expect exports to
increase as our production increases more rapidly than Brazilian
demand for oil.

Our Supply segment also includes petrochemical and fertilizer
operations that add value to the hydrocarbons we produce and
provide beneficial inputs to the growing Brazilian economy.

Our refining capacity in Brazil as of December 31, 2008,
was 1,942 mbbl/d and our average throughput during 2008 was
1,765 mbbl/d.

The following table shows the
installed capacity of our Brazilian refineries as of
December 31, 2008, and the average daily throughputs of our
refineries in Brazil and production volumes of principal oil
products in 2008, 2007 and 2006.

Crude

Distillation

Capacity at

December 31,

Average Throughput

Name (Alternative Name)(1)

Location

2008

2008

2007

2006

(mbbl/d)

(mbbl/d)

LUBNOR

Fortaleza (CE)

7

6

6

7

RECAP (Capuava)

Capuava (SP)

53

45

42

40

REDUC (Duque de Caxias)

Rio de Janeiro (RJ)

242

256

243

254

REFAP (Alberto Pasqualini)

Canoas (RS)

189

142

148

114

REGAP (Gabriel Passos)

Betim (MG)

151

143

132

136

REMAN (Isaac Sabbá)

Manaus (AM)

46

39

41

36

REPAR (Presidente Getúlio Vargas)

Araucária (PR)

189

183

169

183

REPLAN (Paulínia)

Paulinia (SP)

365

324

348

341

REVAP (Henrique Lage)

São Jose dos Campos (SP)

251

205

236

211

RLAM (Landulpho Alves)

Mataripe (BA)

279

254

261

261

RPBC (Presidente Bernardes)

Cubatão (SP)

170

168

153

163

Total

1,942

1,765

1,779

1,746

(1)

We have a 100% interest in each of
these refineries, with the exception of REFAP, in which we have
a 70% share.

The crude oil we currently produce in Brazil is heavy or
intermediate, while our refineries were originally designed to
run on lighter imported crude. We import some lighter crude to
balance the slate for our refineries and are investing in our
refinery

system to maximize our ability to process heavier domestic
crude. These investments will give us the flexibility to adjust
our mix between heavy and light crudes to take advantage of
market prices and match our refinery outputs to product demand.

enhance the value of Brazilian crude oil by increasing our
capacity to refine greater quantities of the heavier crude oil
that is produced domestically;



increase production of oil products that the Brazilian market
demands but that we must currently import, such as diesel;



improve gasoline and diesel quality to comply with stricter
environmental regulations currently being implemented; and



reduce emissions and pollutant streams.

We are in the early stages of building a new 230 mbbl/d refinery
at Abreu e Lima in Northeastern Brazil in a proposed partnership
with PDVSA, the Venezuelan state oil company. This refinery is
designed to process
16o API
crude and will produce 162 mbbl/d of diesel as well as LPG,
naphtha, bunker fuel and petroleum coke.

We are also planning two new refineries located in Northeastern
Brazil: Premium I and Premium II with capacity of 600
mbbl/d and 300 mbbl/d, respectively. These refineries are
designed to process heavy crude oil
(20o API)
and to maximize production of low-sulfur diesel in addition to
LPG, naphtha, low-sulfur kerosene, bunker fuel and petroleum
coke.

The following table shows our most significant planned
investments in our refineries for 2009 to 2013:

In addition to the new projects mentioned above, our
2009-2013
Business Plan includes investments in several key refineries,
primarily for hydro-treating units to reduce sulfur and meet
international standards and coking units capable of converting
heavy oil into lighter products. These investments will allow us
to begin offering diesel in metropolitan areas containing a
maximum sulfur content of 50 parts per million, significantly
lower than current levels in 2009. Of our total
U.S.$18.4 billion in planned refinery investments for 2009
to 2013,

U.S.$13.2 billion will be used for improving diesel and
gasoline quality and U.S.$4.6 billion for delayed coking
units to convert fuel oil into lighter fractions. The principal
planned investments are:

Refinery (Alternative Name)

Objective

RECAP (Capuava)

Upgrade diesel and gasoline quality

REDUC (Duque de Caxias)

Increase heavy oil processing, upgrade diesel and gasoline
quality

REFAP (Alberto Pasqualini)

Upgrade diesel and gasoline quality

REGAP (Gabriel Passos)

Upgrade diesel and gasoline quality

REMAN (Isaac Sabbá)

Install mild thermal cracking units to upgrade the quality of
diesel and gasoline

We use exports and imports of crude oil and oil products to
balance our domestic production and refinery capacity with
market needs and optimize our refining margins, importing light
crude for our refineries and exporting heavier crude that is
surplus to our needs. We import

diesel due to insufficient production in our Brazilian
refineries and export gasoline, largely because ethanol and
vehicular natural gas provide a substantial share of
Brazils light vehicle transportation fuels. We also export
fuel oil and approximately 79% of our bunker fuel production.

The table below shows our exports
and imports of crude oil and oil products in 2008, 2007 and 2006:

2008

2007

2006

(mbbl/d)

Exports(1)

Crude oil

439

353

335

Fuel oil (including bunker fuel)

152

160

168

Gasoline

40

59

44

Other

42

43

34

Total exports

673

615

581

Imports

Crude oil

373

390

370

Diesel and other distillates

100

83

56

LPG

40

29

27

Naphtha

23

17

20

Other

34

19

15

Total imports

570

538

488

(1)

Includes sales made by PifCo to
unaffiliated third parties, including sales of oil and oil
products purchased internationally.

Logistics
and Infrastructure

We own and operate an extensive network of crude oil and oil
products pipelines in Brazil that connect our terminals,
refineries and other primary distribution points. On
December 31, 2008, our

of 65 million barrels. Our marine terminals handle an
average 5,000 vessels annually.

We operate a fleet of owned and chartered vessels. These provide
shuttle services between our producing basins offshore Brazil
and the Brazilian mainland, domestic shipping and international
shipping to other parts of South America, the Caribbean Sea and
Gulf of Mexico, Europe, West Africa and the Middle East. The
fleet includes double-hulled vessels, which operate
internationally where required by law, and single-hulled
vessels, which operate in South America and Africa only.
According to our
2009-2013
Business Plan, we will contract with Brazilian shipyards to
construct 49 new vessels by 2015. The new ships are needed to
upgrade our fleet and handle increased production volumes.
Upgrades will include replacing single-hulled tankers with
double-hulled vessels and

replacing vessels nearing the end of their
25-year
useful life.

We have signed contracts with three shipyards for 23 of these
vessels for delivery between 2010 and 2014, including:



ten Suezmax and five Aframax ships to be constructed by the
Atlantico Sul shipyard, in Suape, Pernambuco;



four Panamax ships to be constructed by the EISA shipyard in Rio
de Janeiro; and



four tankers to be constructed by the Mauá shipyard in
Niterói.

We expect that we will continue to charter additional vessels as
needed in the future.

The table below shows our
operating fleet and vessels under construction as of
December 31, 2008.

In Operation

Under Construction

000 Tons

000 Tons

Deadweight

Deadweight

Number

Capacity

Number

Capacity

Owned fleet:

Tankers

45

2,666,082

23

2,620,450

LPG tankers

6

40,146

0

0

Anchor Handling Tug Supply (AHTS)

1

1,920

0

0

Floating, Storage and Offloading (FSO)

1

28,903

0

0

Layed-up
vessel

1

143,929

0

0

Total

54

2,880,980

23

2,620,450

Chartered vessels:

Tankers

111

11,092.76

PG tankers

24

539.09

Total

135

11,631.85

Prior to the 1997 Oil Law, we held a monopoly on Brazilian oil
and natural gas pipelines and shipping oil products to and from
Brazil. The Oil Law provided for open competition in the
construction and operation of pipeline facilities and gave the
ANP the power to authorize other entities to transport crude
oil, natural gas and oil products. We subsequently transferred
our transportation and storage network and fleet to a separate
wholly owned subsidiary, Petrobras Transporte
S.A.Transpetro. The transfer was required by the Oil Law
and facilitates access to excess capacity by third parties on a
non-discriminatory basis. We enjoy preferred access to the
Transpetro network based on our historical usage levels. In
practice, third parties make very limited use of this network.

We have distributed ethanol to the domestic market through our
pipelines for 30 years. As the global demand for ethanol
has increased, we are investing to expand our ethanol pipeline
and logistics capacity, including:



converting the existing oil products pipeline between Guararema
and Guanabara Bay to transport 2.88
mmm3/y of
ethanol by June 2010, with a plan to expand to 4
mmm3/y by
December 2010; and



building a new ethanol pipeline from Paulínia to São
Sebastião to transport 12.9
mmm3/y of
ethanol, primarily for export.

Our petrochemicals operations provide a growing market for the
crude oil and other hydrocarbons we produce, increase our value
added and provide domestic sources for products that would
otherwise be imported. We aim to expand our petrochemicals
operations in Brazil and elsewhere in South America and to
integrate these into our overall business.

Our strategies are to:



increase domestic production of basic petrochemicals and engage
in second generation and biopolymers activities through
investments in companies in Brazil and abroad, capturing
synergies within all our businesses; and



increase production of fertilizers in order to supply the
Brazilian market.

In the past, the Brazilian petrochemicals industry was
fragmented into a large number of small companies, many of which
were not internationally competitive and were therefore poor
customers for our petrochemical feedstocks.

In 2008, we participated in the consolidation and restructuring
of the Brazilian petrochemicals industry.

In June 2008, we combined our interests in Suzano
Petroquímica (Suzano), including our interest in Rio
Polímeros S.A. and Petroquímica União, with
certain petrochemical assets of União de Indústrias
Petroquímicas S.A. (Unipar) in a new company, Quattor
Participações (Quattor). Both we and Unipar increased
production of polyolefins and basic petrochemicals as a result
of this joint venture.

Also in 2008, Odebrecht S.A., Nordeste Química S.A. and
Braskem S.A. (Braskem) implemented a similar restructuring in
connection with the acquisition of Ipiranga Químicas
assets.

We and our partners combined our interests in certain
petrochemical companies at Braskem.

As a result of this restructuring, we hold minority stakes in
the two principal companies in the Brazilian petrochemical
industry, Quattor (40% of total capital, 40% of voting stock)
and Braskem (23.8% of total capital, 31% of voting stock).

Quattor and Braskem together
operate 27 petrochemical plants producing basic petrochemicals
and plastics, and related distribution and waste processing
operations. The table below shows the primary production
capacities of each of Quattor and Braskem as of
December 31, 2008.

Petrochemical Materials

Nominal Capacity

(mmt/y)

Quattor Participações

Ethylene

1.02

Propylene

0.32

Cumene

0.31

Polyethylene

1.01

Polypropylene

0.88

Braskem

Ethylene

2.48

Propylene

1.13

Polyethylene

1.82

Polypropylene

1.04

PVC

0.52

Through our minority holdings in Brazils two new major
petrochemicals companies, we can better participate in planning
the industrys future needs.

We have four new petrochemicals projects under construction or
in various stages of engineering or design:



Complexo Petroquímico do Rio de JaneiroComperj: a 150
mbbl/d petrochemical facility that will use

our innovative proprietary Petrochemical FCC technology to
convert Brazilian heavy crude into basic and intermediate
petrochemicals, plastic resins, aromatics, coke, diesel oil and
naphtha. We are in the process of selecting strategic partners
and planning this project with a goal of starting up in 2012;

acid plant to start up in 2010. PetroquímicaSuape was
originally a joint venture between Companhia Integrada
Têxtil do NordesteCitene and Petroquisa. In August
2008, Citene declared its intention to withdraw from this
partnership and Petroquisa subsequently acquired 100% of the
project. Construction began in 2008;



Companhia Integrada Têxtil de PernambucoCitepe: a
240,000 t/y of polyester yarn facility expected to start up in
2010; and



Companhia de Coque Calcinado de PetróleoCoquepar: two
calcined petroleum coke plants, one in Rio de Janeiro and one in
Paraná, with a combined capacity of 700,000 t/y. The first
of the two plants is expected to start up in 2011. Coquepar is a
joint venture between Petroquisa (40%), Unimetal (30%) and
Brazil Energy (30%).

Our fertilizer plants in Bahia and Sergipe produce ammonia and
urea for the Brazilian market. In 2008, these plants sold a
combined 231,000 t of ammonia and 695,000 t of urea. We are
currently conducting feasibility studies for two additional
fertilizer facilities:

Our Distribution segment sells oil products that are primarily
produced by our Supply operations and works to expand the
domestic market for these and other liquid and transportation
fuels. Our primary goals are to: create value by meeting growing
customer needs for fuels, including both traditional
hydrocarbons and biofuels; and sustain and expand our market
share by providing superior quality, service and leadership in
the growing biofuels sector.

We supply and operate Petrobras Distribuidora S.A.BR,
which accounts for 34.9% of the total Brazilian distribution
market, according to the ANP. BR distributes oil products,
ethanol and biodiesel, and vehicular natural gas to retail,
commercial and industrial customers. In 2008, BR sold the
equivalent of 698.0 mbbl/d of oil products to wholesale and
retail customers, of which the largest portion (39.6%) was
diesel.

At December 31, 2008, our BR network included 5,998 service
stations, or 17.1% of the stations in Brazil. This total does
not include the 784 stations in Northern, Northeastern and
Northwestern Brazil that we acquired from Ipiranga in 2007, and
which were incorporated into the BR network in April 2009. See
SupplyPetrochemicals and Fertilizers.
The integration of Ipiranga and its service stations into our
network was approved by the Conselho Administrativo de Defesa
Econômica, or CADE (Brazilian Antitrust Authority) in
December 2008.

BR was Brazils leading service station in 2008, with
BR-owned and franchised stations making 26.3% of Brazils
retail diesel, gasoline, ethanol, vehicular natural gas and
lubricant sales, according to the ANP. Most BR stations are
owned by franchisees that use the BR brand name under license
and purchase exclusively from us; we also provide technical
support, training and advertising. We own 656 of the BR stations
and are required by law to subcontract the operation of these
owned stations to third parties.

The retail fuel market in Brazil is highly competitive and we
expect that prices will be

subject to continued pressure. We seek to enhance profitability
and customer loyalty by building on our strong brand image and
providing superior quality and service. We believe that our
market share position is supported by a strong BR brand image
and by the remodeling of service stations and the addition of
lubrication centers and convenience stores.

The primary fuel used in Brazil is diesel, which accounts for
approximately 766.8 mbbl/d (45.5%) of the total Brazilian fuels
market. By law, all diesel sold in Brazil from July 2008, was
required to be at least 3% biodiesel; this proportion will be
increased to 4% in July 2009. We acted as a catalyst for
developing the new market by securing and blending biodiesel
supplies and furnishing these to smaller distributors as well as
our own service stations. Brazil is a global leader in the use
of ethanol as a fuel for light vehicles. Today, 91.2% of new
gasoline vehicles sold in Brazil have flexfuel capability, and
service stations offer a choice of 100% ethanol as well as a
blend of 25% ethanol and gasoline, as required by the regulator.
Although we do not produce ethanol, we have supported the
development of that market by distributing and wholesaling
ethanol and by stimulating improvements in product quality.

Service stations in our network also sell vehicular natural gas.
The number of stations offering this product increased to 453 in
December 2008, from 409 in December 2007, and total gas sales in
2008 were 566
mmm3
(19,989 mmcf).

We also distribute oil products and biofuels under the BR brand
to commercial and industrial customers. Our customers include
aviation, transportation and industrial companies, as well as
utilities and government entities, all of which generate
relatively stable demand.

We also sell oil products produced by our Supply operations to
other retailers and to wholesalers.

Our LPG distribution business, Liquigas Distribuidora, held a
22.3% market share and ranked third in LPG sales in Brazil in
2008, according to the ANP.

We participate in the retail sector in other Latin American
countries through our International business segment. See
International.

For many years, we have been simultaneously developing
Brazils natural gas reserves, infrastructure and markets.
As part of this process, we developed gas sources off shore
Brazil and in Bolivia, the Bolivia-Brazil gas pipeline, a
domestic transportation system and gas-fired electric power
generation capacity. We built two LNG terminals in 2008 to
supplement our domestic supply of natural gas. These initiatives
contributed to increase our supply of natural gas from
approximately 11.0
mmm3/d
(388.5 mmcf/d) in 1999 to 60.7
mmm3/d
(2,143.6 mmcf/d) in 2008. Natural gas supplied 3.7% of
Brazils total energy needs in 1998 compared to 10.3% today
and a projected 14.0% in 2010, according to Empresa de Pesquisa
Energética, a branch of the Ministry of Mines and Energy.

The development plans of our Exploration and Production
operations are expected to result in substantial increases in
gas production from the Espírito Santo and Santos basins
off the Brazilian coast, including from pre-salt reservoirs. We
are investing in transportation infrastructure to deliver these
new volumes to markets in Northeastern and Southeastern Brazil
and to improve the flexibility of our distribution system.
Natural gas imported from Bolivia will play a lesser though
still important role in our operations as we increase domestic
gas production. We are also improving our commercial operations
through a suite of natural gas sales contracts that better allow
us to match supply and demand for gas and electric power.

Our primary goals for our gas and energy segment are to:



add value by monetizing Petrobras natural gas reserves;



assure flexibility and reliability in the commercialization of
natural gas in thermoelectric and non-thermoelectric markets;



expand our LNG business to meet demand and diversify our supply
of natural gas; and

Our natural gas transportation system in Brazil comprises two
main pipeline networks  the 4,413 km
(2,743 mile) Malha Sudeste (Southeast Network), which
connects our main offshore natural gas producing fields in the
Campos and Espírito Santo basins to the growing markets of
the Southeast Region, including Rio de Janeiro and São
Paulo, and the 1,980 km (1,231 mile) Malha Nordeste
(Northeast Network), which transmits gas from onshore and
offshore natural gas fields in the Northeast to consumers in
that region. The Southeast Network includes the 2,593 km
(1,612 mile) Brazilian portion of the Bolivia-Brazil
natural gas pipeline. The two main pipeline networks will be
linked by the Southeast Northeast Interconnection Gas Pipeline
(GASENE), which we expect to be completed by the first quarter
of 2010. In the Northern Region, the 660 km (410 mile)
Urucu-Coari-Manaus
pipeline will connect the Solimões Basin to Manaus, where
natural gas will be used primarily to generate electric power,
and also to meet industrial, commercial and retail demand.

In 2008, we invested U.S.$3.3 billion to improve and expand
our natural gas transportation system. We extended our natural
gas transport system by a total of 776 km (482 miles) to
6,933 km (4,309 miles), including the following additions
to the Southeast and Northeast Networks:



303 km (188 mile) gas pipeline linking Cabiúnas to
Vitória, the site of the gas processing facility that
handles gas produced from the Campos

Basin. This pipeline has the capacity to transport up to 20
mmm3/d
(707 mmcf/d) from the Espírito Santo Basin to the Southeast
Region;



255 km (158 mile) addition to the CampinasRio
pipeline in the Southeast Region with capacity to transport up
to 8.6
mmm3/d
(303.7 mmcf/d) of natural gas, increasing our ability to
deliver volumes imported via the Bolivia-Brazil gas pipeline to
market;



196 km (122 mile) gas pipeline linking Catu to Itaporanga
with the capacity to transport up to 10
mmm3/d
(353 mmcf/d) of natural gas from the Manati gas field and other
sources to the Northeast Region; and

In addition, we are in the final stages of a pipeline
construction program that will connect most of Brazils
principal gas pipelines, allowing gas to be transported through
pipelines from the South to the Northeast of the country and
from the Solimões Basin to the Amazonian market. This will
increase the capacity and flexibility of our natural gas
networks and allow us to make better use of growing gas
supplies. We expect that the program will be completed by the
first quarter of 2010. The program includes:



constructing the 954 km (593 mile) final section of the
GASENE, completing the link between Malha Sudeste and Malha
Nordeste. This pipeline will transport up to
20 mmm3/d
(707 mmcf/d) from

We have completed construction of two LNG terminals, one in Rio
de Janeiro with a send-out capacity of 20
mmm3/d
(706 mmcf/d) that was completed in January 2009, and the other
in Pecém in Northeastern Brazil with a send-out capacity of
7 mmm3/d
(247 mmcf/d) that was completed in December 2008. The terminals
will be supported by two large LNG regasification ships with a
capacity of 14
mmm3/d
(494 mmcf/d) and 7
mmm3/d
(247 mmcf/d), respectively. The new terminals and regasification
ships give us the flexibility to import gas from other sources
to supplement domestic natural gas supplies. We have negotiated
and signed with several

companies LNG supply contracts and Master Sales Agreements that
will be used to acquire spot cargoes as needed.

Under Brazilian law, each state holds a monopoly over local gas
distribution. Most states have formed companies to act as local
gas distributors and we hold interests that vary from 24% to
100% in 20 of these 27 distribution companies. Nonetheless, in
all of the companies where we hold a minority stake, we appoint
executive officers and members of the board of